All posts in category Politics

With Greece’s problems ‘solved’, or at least kicked into the long grass, fewer signs of contagion spreading to the euro-zone’s other troubled nations like Italy and Spain, the financial markets rallying, and confidence returning among consumers and businesses, European leaders could have been forgiven for thinking they’d earned their salaries, and more.

Now, not quite out of the blue, an unwelcome visitor has returned – the specter of recession.

We all knew that China is slowing. Indeed, there were hopes that the authorities had succeeded in lowering the temperature gradually of an overheating economy, thereby avoiding a sudden and catastrophic freeze. On Thursday, however, came an indicator suggesting that it’s now cooling too quickly.

The HSBC preliminary manufacturing purchasing managers’ index, or PMI, fell to 48.1 in March, a four-month low, compared with a final reading of 49.6 in February.

Europe’s financial markets tumbled Thursday on renewed concerns about a slowdown in global growth, prompted by worse-than-expected data from both China and the euro zone.

Stock market indexes in the major European centers were down by 1% or more, while the Australian dollar and other so-called ‘commodity’ currencies weakened on fears of a slowdown in Chinese imports of raw materials.

The euro dropped too, as yields fell on ‘haven’ core European government bonds such as German bunds and U.K. gilts. By contrast, yields were higher on ‘peripheral’ European sovereign bonds, such as Italian BTPS and Spanish bonos.

Among the commodities, there were falls in oil and gold prices, as well as in the prices of industrial raw materials, such as copper.

The markets were responding to news that the HSBC preliminary manufacturing purchasing managers’ index for China fell to 48.1 in March, a four-month low, compared with a final reading of 49.6 in February. A rise above the 50 mark separating expansion from contraction had been widely predicted, and the data added to fears of a significant slowdown in the world’s second-largest economy.

Adding to this was news that the composite ‘flash’ PMI for the euro zone fell to 48.7 in March, its lowest level for three months, from 49.3 in February, when a rise to 49.6 had been predicted.

Euro-zone finance ministers ended a conference call over a new bailout and debt restructuring for Greece late Wednesday with their chairman expressing optimism that a long-awaited accord could be wrapped up soon.

Jean-Claude Juncker, the Luxembourg prime minister who chairs the ministers’ meetings, said there had been “substantial further progress” since yesterday in negotiations between Greece and its so-called troika of international official lenders—the European Union, the International Monetary Fund and the European Central Bank.

In a statement after the call, Mr. Juncker said the lenders had received assurances of support for the austerity program that will accompany the deal from the two party leaders in Greece’s ruling coalition—New Democracy leader Antonis Samaras and Socialist party George Papandreou–and said €325 million of additional budget cuts for this year had been identified, as required by the lenders.

But he said further moves were necessary before agreement could be sealed: measures to make sure the agreed economic reform program was implemented and to ensure that servicing the debt would be a priority for Greece.

Earlier Wednesday there new signs of concern as the euro-zone economy shrank in the fourth quarter of 2011 as nine member states posted a fall—five of which entered a recession—raising concerns the wider region will follow.

Data from European statistics agency Eurostat on Wednesday showed that gross domestic product across the 17 regions that share the euro contracted 0.3% in the final quarter of 2011 compared with the third, and grew 0.7% compared with a year earlier.

That is the first quarterly contraction since a 0.2% drop in the second quarter of 2009, while the year-to-year gain is the smallest since the fourth quarter of 2009 when GDP shrank 2.1%. And, for the whole of 2011, Eurostat calculates GDP grew 1.5%, down from 1.9% growth in 2010.

Meanwhile, the Bank of England left open the possibility of further stimulus for the U.K. economy after its latest forecasts showed inflation is likely to remain below its 2% target for the next two years.

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6:55 am (EST)

Greek Default No Longer Taboo?

Terence Roth

The chances of a Greek default, once unthinkable, now loom larger as more European leaders take comfort in the belief that the euro-system is better positioned to absorb the shock that just six months ago.

If it comes, the reason will be there were too many moving parts, too many delays and a new perception of diminishing risk for the euro-zone as a whole.

Peer Steinbrueck (pictured), former German finance minister and future chancellor candidate, has an advantage over Wolfgang Schaeuble of being in opposition and able to say whatever he wants.

He took that advantage in a speech in Washington overnight, saying a bailout for Greece is on the brink of collapse and that, if he were still finance minister, he’d have asked aides for a “Plan B” for a Greek default months ago, Die Welt newspaper reports.

Doubtless the same idea has occurred to Mr. Schaeuble, whose increasingly hardening line on Greece was on display again Wednesday when he doubted how committed the Greek government would be on reforms after a second bailout the new elections set for April. Germany won’t commit to a “bottomless pit,” he says. And the decision on whether Greece goes or stays lies in Athens.

Euro-zone finance ministers have sent Greece back “to do its homework” before it can clinch fresh multi-billion euro aid to avoid default on its debt next month.

Weeks of political drama and bargaining with international lenders in Athens didn’t help ease mistrust and anger among European governments toward the Greek political leadership, with many of them demanding more proof that the country will fulfill its past and present pledges.

Greece must push through the reforms package for a parliamentary vote, possibly Sunday.

Once the measures are finalized, the Troika judges if the deal is satisfactory and puts together a report recommending whether Greece is eligible for a second bailout loan. At the same time the IMF is expected to prepare a new debt sustainability analysis on Greece’s debt. The original bailout plan targets reducing Greece’s debt to 120% of GDP by 2020.

The Greek parliament also soon needs to adopt at some time legislation to retrofit bonds with collective action clauses, a provision that would bind a minority of holders to the decisions of the majority.

Germany’s lower house and some other European parliaments, such as Finland’s, must approve their countries’ contribution to the Greek bailout before funds can be disbursed.

Euro-zone finance ministers meet to grant approval to the final bailout package. A meeting to discuss the deal has been set for Wednesday.

Greece launches the bond exchange offer to private-sector creditors. Under the original timetable, the bond exchange offer, which will run for three weeks, was due to start on Feb. 13, a deadline Greece has now missed. It will need to stick as closely as possible to this date to complete the PSI by early March to mid March. After that, bailout loans will be disbursed.

On March 20, Greek bonds of €14.4 billion mature. Greece has a seven-day grace period to make the payment.

The ECB will make a decision on whether to participate in the debt restructuring by foregoing profits on its own bonds once all other elements of the package, including a debt sustainability analysis by the IMF, are in place.

Greece’s political leaders agreed unpopular budget, wage and pensions cuts that moved Europe to the verge of approving a new bailout to stave off a messy Greek debt default, but euro-zone finance ministers demanded the measures pass the Greek parliament before they would finally to sign off on the deal.

The demands from the finance ministers set the stage for a further week of uncertainty over the long-awaited bailout and debt-restructuring package for Greece. The focus will shift to the Greek parliament on Sunday where the euro zone is insisting the program is agreed. “In short, no disbursement [of aid] without implementation,” said Jean-Claude Juncker, the Luxembourg prime minister who chairs the ministers’ meeting.

Greek Prime Minister Lucas Papademos said Thursday that a pending dispute among political leaders supporting his government over pension cuts was resolved paving the way for Greece to receive a €130 billion bailout ahead of a mammoth debt repayment next months. European economic and monetary affairs commissioner Olli Rehn confirmed that the EU had received a staff agreement between Greece and a troika of officials from the country’s international lenders.

The demands underline the erosion of trust between Greece and its creditors in the euro zone. A further meeting of euro-zone ministers is scheduled for Wednesday to finally sign off on the agreement, assuming the package passes parliament.

Against this backdrop, the European Central Bank held its regular rate-setting meeting. Its president, Mario Draghi, confirmed that the Greek prime minister told him by phone that a deal between political leaders had been struck.

He indicated that the ECB appears willing to help Greece reduce its debt load but ruled out taking any losses, saying it violated the ECB’s rules. But Mr. Draghi left the door open of some kind of bond transfer to the European rescue fund whereby the ECB gives up future profits but doesn’t take a loss. On the economy, Mr. Draghi was cautiously upbeat.

Earlier, the central bank announced that it would keep its core interest rates on hold.

Meanwhile, the Bank of England announced that it is injecting another £50 billion ($79 billion) into the British economy, which contracted in the last three months of 2011. It also said interest rates would remain unchanged at a record low of 0.5%.

Against this backdrop, the European Central Bank is holding its regular rate-setting meeting and is widely expected to keep its interest rates on hold.

But market participants will be closely watching ECB President Mario Draghi’s statement for any clues as to how the central bank will deal with the intensifying crisis in Greece.

The Bank of England is also hold its monthly rate-setting meeting. Analysts expect it to increase its quantitative easing program by between £50 and £75 billion.

5:54 am (EST)

Welcome

WSJ Staff

Welcome on what promises to be another busy day for Europe.

Faced with a tight deadline on March 20, when a €14.4-billion bond comes due, Greece and its international creditors are fast running out of time to wrap up a deal with European and International Monetary Fund officials.

This also includes a €100 billion debt write-down plan with the creditors. Approval of the bailout package will pave the way for a bond-swap offer to the private sector, which Greece is hoping to complete by early March.

Pressure on Greece has been piling up from its euro-zone partners to accept the new round of painful austerity in exchange for the aid promised to the country last October.

The international lenders have asked Greece to come up with €3.2 billion in spending cuts for 2012 alone. They also sought the mass layoff of some 15,000 civil servants in Greece's bloated public sector in 2012, as well as steep cuts in supplemental pensions paid to retirees.

Speaking after a five-hour meeting with a delegation of European and International Monetary Fund officials, a visibly tired Evangelos Venizelos (pictured), Greece's finance minister, signaled that he expected euro-zone finance ministers to bridge differences over the loan program at a meeting scheduled for later in the day.

"I leave in a short while for Brussels with the hope that the euro group meeting will convene and that it will take a positive decision for the new program," he said. "There remain issues that need to be clarified by the time of the euro group meeting."

German Chancellor Angela Merkel states publicly that she doesn’t want Greece to exit Europe’s single currency, but the realities of German domestic politics have her hands tied.

Agence France-Presse/Getty Images

German Chancellor Angela Merkel.

An increasing number of lawmakers seems to have given up on Greece and the German public appears to have few worries that an insolvency and Athens’s dropout from the euro zone would be a death sentence for the euro.

Wichard Woyke, professor of political science at the University of Muenster, said Germany is willing to give up on Greece because Athens hasn’t lived up to its promises. If Greece were to leave the currency bloc, contagion risks would be reduced because of the progress made by other struggling euro-zone countries in implementing reform.

“My impression is there is a growing willingness among political leadership as well as the German society to say that we will make it without Greece,” Mr. Woyke said. “Of course there is frustration. It’s difficult to legitimize to the German public further aid to Greece.”

After building the image of a tight Franco-German alliance to fight the crisis, French President Nicolas Sarkozy may feel his German counterpart has over-stepped the (Deutsche) mark.

Angela Merkel’s support for his re-election provoked an awkward, cold response from Mr. Sarkozy, who is playing a delicate game of holding back his candidacy until the last moment.

“I did not know she voted in France,” the French President said in an interview with multiple television channels on Sunday evening.

Meanwhile, Mr. Sarkozy has been forced into another balancing act: cutting the growth forecast while avoiding the kind of austerity that many Europeans see as “brand-Merkel”. Many voters see the German leader as imposing painful, unwanted austerity across the euro zone.

The EU has taken another step forward in its effort to prove to investors that the budgetary laxness that contributed to its current crisis won’t be repeated.

But it’s unlikely that investors will be so persuaded until they see the new fiscal compact agreed Monday in action, bearing in mind the disappointing implementation of previous budgetary rules.

So even if governments that now have difficulty borrowing are doing their utmost to cut their deficits and stick to the rules, it may be some time before they see the benefit in terms of lower borrowing costs.

Which is the problem that a group of European economists seek to address with a new proposal announced Tuesday. Acting under the umbrella of European League of Economic Cooperation — a pro-European business group that dates back to 1946 — they want euro-zone governments to pool their short-term borrowing for a period of four years after the compact comes into force early next year.

Their “Euro T-Bill Fund” would issue debt with a maximum maturity of two years under a joint and several guarantee, meaning that all governments would be equally responsible for repaying the debt.

A man walks by the closed doors of Brussels central station during a general strike all over Belgium which coincided with the summit.

Leaders of 25 European Union governments agreed Monday night on what some billed as a historic pact to move to closer fiscal union and signed off on the details of a permanent bailout fund for the euro zone—yet Greece’s looming debt restructuring threw a shadow over the summit.

The leaders discussed Greece but provided no further clarity on the eventual outcome of an issue that was creating increasing nervousness in financial markets Monday.

After Monday’s meeting, senior officials said they expected a debt-restructuring accord in “coming days,” in time to launch a bond-exchange offer to private investors by mid-February.

One question the summit didn’t address: whether official creditors, such as the ECB, will also be needed to reduce Greece’s debt to levels that it is likely to be able to sustain in the long term.

After the summit, Greek Prime Minister Lucas Papademos met with other senior European officials, including Jörg Asmussen, the German representative on the board of the ECB. Officials said the talks likely concerned conditions to be imposed on Greece so it can receive its new loans. But afterward, Luxembourg Prime Minister Jean-Claude Juncker, who attended the meeting, said it yielded no conclusions.

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6:33 am (EST)

Welcome

Jenny Paris and William Kemble-Diaz

European Union leaders will gather in Brussels today with the intention of finalizing accords to create a permanent bailout mechanism while also seeking to tackle slow growth and high unemployment.

But talks among the 27 EU leaders may be overshadowed by a looming deal between Greece and its creditors to halve its privately-held debt. Greece and its private-sector creditors are reported to be edging closer to an agreement over the €100 billion debt write-down with bondholders.

The deal must be agreed by the end of the month for Greece to make an offer for a bond exchange to its creditors by Feb. 13 and avoid default on a major bond redemption next month.

However, before then, Greek political leaders must provide written assurances to the country's senior official lenders that they will abide by tough reforms, regardless of who wins a pending election likely to be held in April.